If it's about value investing, I'm interested. I run a global equities fund that invests in the United States, Europe and Asia. As the president and founder of JBGlobal.com LLC, a registered investment advisory firm, I manage separate accounts for high-net-worth individuals and trusts. I also publish a monthly stock letter, The Berman Value Folio, a Trefis publication distributed by Forbes. Teaching is another passion; as a faculty member in the Finance Department of the NYU School of Professional Studies, where I received a 2014 Award for Teaching Excellence, I teach Corporate Finance and the Fundamentals of Buffett-Style Investing. My book, Lessons from the Lemonade Stand: a Common Sense Primer on Investing, winner of the 2013 Next Generation Indie Award for Best Non-Fiction eBook, is a guide for the first-time investor of any age. I received a B.A. from Harvard University and a J.D. from Harvard Law School. My wife Carrie, daughter Sasha and I live in Greenwich Village where I find the lessons of value investing as useful in life as in money.

News Flash: Flash Boys Not News

In his recent book Flash Boys, Michael Lewis alleges that high frequency traders “rig” markets by legally front-running the trades of small traders. The little guy has no chance against these modern-day pirates.

Shock and awe. Allow me to sit down and digest this earth-busting revelation.

The small trader has never had a prayer against sophisticated hedge funds anyway–players whose savvy in even normal trading dooms the hapless day trader, sitting in his underwear in front of a couple of useless screens, unaware that his behavior is gambling–no different than any strung-out, pitiful Vegas junket.

Aside from trading against high frequency creatures at the top of the food chain, the average market participant who tries to time price fluctuations never stood a chance: the frictional costs of bid-ask spreads, commissions, illegal insider trading and taxes have always ensured that the house wins in the end. What’s some legal front-running added to the mix? The antidote is to treat stocks for what they are: pieces of underlying businesses with real economic fundamentals. If you understand a stock is a claim on the underlying cash flows of a business (however risky) and not simply a blip on a screen, and you hold it long enough to reflect that reality, you circumvent the high frequency traders.

Take a front-running high frequency trader who trades ahead of your 100 share bid for AppleApple at $540 per share. Assume the trader anticipates your bid, buys Apple at $540, and then effectively sells it back to you for $540.05, robbing you of the nickel you would’ve held onto were the trader not ahead of you. You’ve been legally fleeced of five bucks.

Is it right? Of course not. Should the regulators ban it? Of course.

Will it make a difference in your returns? That part is up to you, not the high frequency trader.

If you bought Apple because you thought you could turn around and sell it a few seconds, hours, or days later at a dime profit, well then you’ve just played in the casino and lost. The high frequency trader will steal another nickel when you sell. After the commission, you’ve come out a small-time loser. Add up thousands of those doomed trades over a year, you come out a big-time loser. Try to retire on that strategy: you’ll be a pauper soon enough.

But if you bought Apple because you thought the stock was worth at least $650 based on business fundamentals–and the stock rises to reflect those fundamentals over the next three years–then you’ll make 20% plus dividends on the investment (alert: it’s an investment, not a trade), even after paying out a nickel on each side to the high frequency hucksters. That’s successful long-term investing in a nutshell.

Don’t take it from me. Take it from someone who should know: Warren Buffett.

In this year’s letter to shareholders, Buffett addresses this exact issue. He advises the average investor to ignore market volatility and the manic fluctuations wrought by high frequency traders. He compares owning a stock to owning a farm and explains why frenetic trading of his farm would be idiotic. So also for stocks. Buffett explains how flash crashes and other distortions which pull market prices from intrinsic value temporarily are the best friend of the long-term investor. They provide opportunity to buy stocks at artificially low levels:

A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.

While you wait for the regulators or anyone else to protect you, why not just do an end run around the high frequency traders by being a long-term investor? And to anyone who thinks these issues (or even the proposed remedies) are news, someone somewhere has a bridge to sell you. Along with that nickel-inflated stock.

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